Bryan Caplan Politely Declines to Join the Pigou Club

Arnold is mistaken to think that my notes on signaling indicate that I've joined the Pigou Club. If you read the quote carefully, I only say that a tax on education could increase efficiency. I don't advocate such a tax. (The alternate section title "Why Education Should Be Taxed" is tongue-in-cheek, though you might need to attend the lecture to realize that).

1. You deny the existence of these externalities as a type of market failure...

2. You recognize the externalities but you don’t think the government should try to respond to them. You are such a believer in small government that you are willing to live with inferior economic outcomes, such as pollution and congestion.

3. You recognize the externalities, think the government should try to correct them, but think the current low taxes we put on gasoline are sufficient...

4. You recognize the externalities but think the government should try to correct the market failure through regulations (such as CAFE standards) or through market-based solutions that do not raise government revenue (such as cap-and-trade systems)...

Most of the economists I know would probably appeal to a fifth concern: public choice arguments. Once you give the government the power to tax things that it calls "negative externalities," it's got an excuse to tax almost anything, and will probably use it eagerly. Personally, I've noticed a near-perfect correlation between stuff that economists think is bad and stuff that they think has negative externalities.

But my fundamental objection is #2. And contrary to Mankiw, you don't have to be a believer in small government to take this position. Anyone who thinks that speech should not be taxed no matter how offensive it is takes this position. Anyone who thinks that extremely unpopular religions should not be taxed takes this position. Indeed, if you think that you should be able to marry whoever you like, no matter how much your parents hate them, you don't really belong in the Pigou Club.

I'm not going to say that Pigovianism is inherently totalitarian. But I will say that if intolerant preferences are widespread, then Pigovian thinking justifies totalitarianism. There's no denying it: If most people are horrified by the sight of an unveiled woman, then Pigovian logic requires a massive tax on visible female faces.

My view is that people have a right to create all sorts of negative externalities, and other people basically just have to live with them. Unhappy campers have a right to complain about the externalities, refuse to associate with those who create them, or buy a large bloc of land and require visitors to abide by their rules. But they have no right to pass laws to do anything about most externalities. For example, even though I think education has important negative externalities, I don't want to do anything more than eliminate government subsidies for education.

This does not mean, of course, that all negative externalities should be legal. Murder creates externalities, and I'm firmly against its legalization. But the right place to draw the line, in my view, is at physical trespass.

Of course, "physical trespass" itself requires line-drawing, because even the act of breathing shoots atoms at unconsenting strangers. So if someone wants to use a Pigovian approach to e.g. air pollution, I grant that the externality might qualify as a physical trespass. To this much narrower class of externalities, I'm open to Pigovian solutions. But until Pigovians forthrightly acknowledge that the right solution to most negative externalities is tolerance, not taxes, I'm not going to join their club.

With all the talk about Pigouvian taxation, I thought I would highlight Bryan Caplan's recent thoughts: I'm not going to say that Pigovianism is inherently totalitarian. But I will say that if intolerant preferences are widespread, then Pigovian thinki... [Tracked on July 3, 2008 9:53 PM]

If someone is murdered we know that was the cause of death.This is not the case for chronic exposure to air pollution from emissions. Accute vs chronic. It also probably includes death from carbon monoxide, they want to publish a high number.

This seems to be in part a slippery slope argument that doesn't seem too compelling. If totalitarian preferences are widespread, it's pretty hopeless to restrain government. You can theorize about line drawing, but lines never stop totalitarians.

It seems to me that a less overheated public choice argument might be more persuasive. That the government will structure taxes to favor some industries and distort the market or just get the amount of tax wrong, so that the overshoot is worse than the externalities.

The externalities from gasoline consumption are pretty enormous though. Forget pollution, just think about traffic congestion losses and auto accidents.

In short, what the Club Pigou people are saying is that anytime the price of some good or service rises while demand for it also rises, that's a negative externality because it's harder to get the thing you want so it should be taxed. In a sense if too many people are crowding you out of a market Pigovian taxes should step in. Too many drivers on the road? Tax drivers. Too many students? Tax students, etc...When in fact the rise in price should be sufficient indication. Why do we need an extra tax?

Caplan: "There's no denying it: If most people are horrified by the sight of an unveiled woman, then Pigovian logic requires a massive tax on visible female faces."

I can deny it. At least my understanding of Pigovian taxes is that they are for optimizing the economy, not for making society more in accordance with your preferences. Being "horrified" doesn't necessarily imply an economic loss.

Unit: "In a sense if too many people are crowding you out of a market Pigovian taxes should step in. Too many drivers on the road? Tax drivers. Too many students? Tax students, etc...When in fact the rise in price should be sufficient indication."

I don't agree. If education is priced and crowding makes institution hike prices and thus lose you as a student-costumer, the costs of crowding are internalized (they lost your money, right?). Congestion costs on roads that are free to use, though, are external. There is no denying that congestion taxes could improve economic efficiency. But the typical case of you being crowded out of a market will have internalized costs.

I could be wrong, but my point was that some think that people themselves are pollution (just the sheer numbers). After all pollution is bad in big cities because they're over-crowded. You could call this an externality or you could just add the inconvenience of breathing polluted air to the cost of driving.

Brian's complaint about Pigovian solutions is that the legislature is very poor at applying redress with the taxes. His hint at physical trespass identifies another part of government, tort, that can apply the redress to the victim.

The real issue here is potential damages by co2 pollution, the libertarian quandary. The Pigovian tax solution may work, but only after very long periods of legislative exchanges in which transactions costs go way up.

Stylized Example - Someone gets sick from air pollution (which happens all the time - go visit a respiratory ward and you'll see what I mean) and racks up a $10,000 medical bill. For the sake of argument, assume that 90% of that pollution came from automobiles and there are 30,000 registered cars in the area.

I have clearly been harmed here. But what is my option - to sue each and every driver in the city for 37 cents to cover my damages?

Often times, we tend to think of one argument, or one topic, as if it were the only topic in existence at that time, when in fact there are large venn diagrams of principles that come in to play.

First, murder is a violation of someone else's right to live. So when we deal with a subject of murder, it's not just murder's externalities that are the issue, it's that the entire act of murder is a negative externality of whatever physical behavior (stabbing, shooting, etc) caused the murder.

So, when discussing Pigovian taxes, lets try to remember the other rights that may already trump Pigovian taxes: property rights, right to life, etc.

There are several problems with the notion of Pigovian taxes just from the initial theory: how do you identify an externality? Let's take the classic smokestack example. The smokestack cranks out "pollutants." There are varying degress of harm that they could cause. For humans and the earth, they could be of the range from beneficial, to no idea, to deadly. They could conceivably be opposites for the earth and humans at the same time. And since nothing hurts dirt, just the things that grow and live in it, if you break up the definition of earth you wind up with millions of other things that could respond in diametric fashions to said pollutant.

So, how do you start to identify the balance from good to bad? Furthermore, even if you can say that you can, in some absolute way, identify a net negative externality, how can you quantify so it can be offset by a tax? We should all know that the less of a bad thing is harmful, and more is more harmful, so if by taxing the harmful entity you decrease it's occurrence, you're may then then automatically overtaxing it since it's now less harmful. For example: 6 billion cars running each day producing CO2 somehow requires X dollars for us to sequester or we suffer. So you compare X dollars cost and Y gallons purchased and come up with a tax on the purchase of gasoline. Great. But now, the XY tax reduces the amount driven, so the X dollars sequestering cost may be less. If it is, then the XY tax is now too much and needs to be adjuested.

But what if the opposite occurs? What if by decreasing the occurrence you also increase the cost of cleaning it up? What if the systems in place are able to do it for X given quantity Y and still cost X for half Y? What does that tax have to be then? At that point the tax would spiral out of control upward (assuming you continue to do such adjusting)

OK, lets say we find an equilibrium for that tax. What about the negative externalities of that tax? Are we sure we have considered all of them? Let me propose that certain activites that have some environmental negative externality could have, in their use and continued use, major positive externalites. If those positive externalities of the product outweigh the negative externalities of the production, then in my estimation it has paid for itself.

Of course, the objection to that is that the negative externalities are affecting those who are not benefiting from the positive externalities brought by the use of the product. But by that point how on earth could you begin to try to determine and then factor in who is and who isn't and how much to tax?

If you bring a purely arbitrary example: a factory's production causes smog that reduces the human lifespan by 1 year. But the factory makes medicine that increases the human lifespan by three years. 15 people live right near the plant, taking on the full effects of the smog. 10 people take the drug, 5 don't.

OK, so with all that information, we know exactly all the positive and negative externalities of this activity. This activity is a net-positive. But for 5 people, it's a net negative. 5 people have lost 1 year of life for a total of 5 years life lost. Yes that is offset totally by the 20 net years gained by the 10, but I don't think the 5 are too concerned with that. So, do we enact a tax? What are the 5 years lost worth? How do we determine their effect? And, if in determining the tax, is it set so high that one or more of the 10 are unable to purchase the drug? Let's just say one can't. Due to the decrease in purchasing of the drug, there's less smog, so now those who don't take it lose only 10 months of life. OK, so now those 6 lost 60 months of life. That's 5 total years. Sure these numbers are arbitrary, and you could just as easily write that they now only lose 9 months of life and that's 4.5 years lost, but what about the opportunity cost of the 6th person? He could have lived two extra years! The opportunity makes it 6.5 years lost if you do nine months and 7 years lost if you do 10 months. Either way, it is completely misleading to say for certain this tax is a net benefit to society.

Also, if the 5 who suffered from the smog, originally just decided to move, Imagine how different a cost-benefit analysis would be? They may lose some money in the transaction (property values would probably be lower due to the proximity of the smokestacks) but they gain one year of life without, as far as I can really see without branching out into more abstract hypotheticals, imposing any new negative externalities.

I agree with most here in that the externalities caused by the burning of fossil fuels are much, much more harmful than the bare face of a woman in a society that is horrified by such sites.

Moreover, pollution affects us in ways that we cannot 'get used to;' an unveiled woman on the other had is something that can easily become a societal norm. Indeed, I think that the argument that Pigouvian taxes like a tax on gas would lead to totalitarianism is fallacious for two reasons.

First, it implies that the ends do not justify the means, even when the means are not restrictive. Indeed, the ends here are healthier people (the very purpose of government) and the remedy of a negative neibourhood effect (again, the very purpose of a liberal government). Or do you contest that these two operations are teh fundamental reasons for government? Second, there are many different gov't schemes--ones that are far more nefarious--that should be repealed because they, rather than correcting distortions, create them. E.g., rent controls in NYC, nationalized old age security, quotas, public housing, and minimum wage laws.

If you truly feel that the government is not there to tax negative externalities, it must not, therefore, encourage actions that create positive externalities. That is, you must--if you want to be internally consistent that is--also call for the repeal of national education subsidies, minimum education levels (indeed, these allow government bodies to decide exactly what we inculcate our children with), vaccinations, and many other 'good' economic activities.

While I do enjoy reading this blog, I must say I think your argument on Pigou taxes is illogical.

I'm sure people in the most polluted of cities in the world get very sick, but in America this rarely ever happens. The people who do get sick have exposure at work in a foundry or a warehouse with forklifts.

Caplan: "There's no denying it: If most people are horrified by the sight of an unveiled woman, then Pigovian logic requires a massive tax on visible female faces."

I can deny it. At least my understanding of Pigovian taxes is that they are for optimizing the economy, not for making society more in accordance with your preferences. Being "horrified" doesn't necessarily imply an economic loss.

Yes it does. My being horrified has a great cost to me. It can ruin my day. I'm most certainly worse off. You're trying to narrow economics, to fit your purposes. The most interesting economics of the last 20 years has been about topics other than the "economy", i.e. Gary Becker.

For most men seeing a naked woman has a lot of economic value. The popularity and price of strip clubs reveals this preference. What about seeing a shirtless hairy fat guy on the street, can you deny that has a real "economic" cost? What if it gives me nightmares and I can't sleep?

The problem is that government must have the incentives to tax and subsidize the right things, but those incentives are provided by the median voter and special interests. Just because a government was supposedly created to ensure a healthier, more peaceful society doesn't mean its achieving its stated goals.

Without a moral framework to decide what externalities should be taxed and subsidized (in the libertarian framework, only physical externalities seem to count), Pigou seems impotent to me.

I completely disagree with you. The negative externatilities directly harm other people's health and property, by polluting their property and bodies. Therefore, you should be required to pay them for the damage you've done to them. It is nothing like marrying someone whom your parents don't like. That can be considered none of their business if they stay out of your life. But the people you harm through pollution can't stay out if they try- they're stuck in a bad deal arrangement with people who pollute their air.

The first problem I have with this is calculating what the optimal price of gasoline should be.

We do not currently have an open market for oil. The vast majority of it is off-limits to people motivated by market forces. This seems to throw a monkey wrench into the discussion from the start, as I have yet to see a discussion among economists about Pigouvian taxes that does not start with the assumption of a commodity being effiiently allocated by the market expcept for an unpriced externality.

So, first there is the challenge of figuring out what oil price a free market would produce. "A lower price" would certainly seem to be the answer, but just how much lower? My guess is that with open private market access to reserves across the world we'd see oil prices in the $20 per bbl range before long. So should we be talking about Pigouvian rebates with oil at $140?

Then there is the challenge of quantifying the externalities. I have seldom seen anyone attempt to do this, and what efforts I have seen tend to have highly dubious assumptions (for example, attributing a large chunk of the cost of the US military to oil.)

Mostly, what I have observed is that the analysis to support a given Pigouvian tax proposal is either a) non-existent; b)done with astonishing ignorance of oil markets; or c) littered with assumptions driven by rank ideological partisanship.

So, while I could support a well documented and supported Pigouvian tax in theory, I have yet to see one that even comes close to meeting that bar.

That a "Pigou Club" can exist and advocate a large tax without this basic fundamental analysis is itself a big concern to me. That's why I fall on the "do not trust them with this power" side of the argument. Those who wish to use the power have not shown they are willing and able to use it responsibly.

Mankiw himself is quite guilty of this. He is entirely willing to toss out a number of what the Pigouvian tax ought to be based entirely on his own gut feel.

The "tolerance, not taxes" line seems like a red herring. You can tolerate something AND tax it at the same time, and in fact, that is what is typically proposed in Pigovian taxes. Mankiw doesn't want to abolish cars. He wants people to keep driving them, but pay more taxes.

A "massive" tax on exposed female faces doesn't fit the Pigovian formula if what is meant is that the tax is sufficiently "massive" to prevent any females from going bareface. In that case, no revenue would be raised, and what would have been implemented is a de facto ban. A slight tax, too, could be ruled out on the grounds of being too difficult to administer, but put that to one side. What would be so bad about a slight tax on bare female faces? The incidence of the tax would be regressive but could be offset by other taxes and/or transfers. Stupid, I agree; but totalitarian, no.

The anarchist view of free speech gets people killed. Even the Framers would not have wanted untrammeled discretion in the marketplace of ideas. Putting aside the easy cases (like shouting fire in a crowded theater), there are hard cases that are just as important (like when journalists trade social capital built up in public institutions like the military for Pulitzer Prizes).

The Internet makes the anarchist argument seem correct because the probability of our next-door neighbor reading our blog posts and grabbing the pitchfork are pretty low. But the same risks of violence are still there.

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